January 27, 2011 

U.S. Department of Labor 

Employee Benefits Security Administration 

Re: Comments on DOL Proposal to Expand the Definition of Fiduciary

I am the owner and sole professional of a small business valuation firm that consists of myself and 

two part-time assistants. I am a long-time Accredited Senior Appraiser of the American Society of 

Appraisers. I have over 30 years of experience in providing business valuations, many of which are for 

ESOPs. I am a former member of the Valuation Advisory Committee of The ESOP Association. I 

provide high-quality appraisals and charge reasonable fees. My clients frequently praise the thoroughness 

of the appraisal analysis. 

I have the following six primary concerns with the DOL proposal: 

1) It will force experienced ESOP appraisers to exit the market. 

 2) An appraiser that is a fiduciary can no longer be considered “independent.” 

 3) Distinctions must be made as to the broad array of services provided by ESOP valuators. 

 4) Better remedies are available to address the “problem.” 

 5) The only beneficiary of the proposal will be ESOP litigation attorneys. 

 6) The problems raised by co-fiduciary liability. 

These concerns are detailed below. 

1. If your proposal is enacted, I may be forced to exit the ESOP valuation arena. It is doubtful 

whether a sole practitioner like myself will be able to obtain fiduciary insurance. The personal financial 

risks would be too high to continue to provide ESOP appraisals without liability coverage. While the 

plight of one appraiser is not the DOL’s concern, consider that all of my ESOP clients will be forced to 

find another service provider that will probably 1) be less qualified than myself, 2) provide appraisals that 

are less comprehensive and of a poorer quality and 3) charge a significantly higher fee. 
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Because of the inability to obtain fiduciary insurance, small firms with experienced ESOP 

valuators may be replaced by a limited number of national accounting/appraisal firms, with much of the 

work done by inexperienced junior analysts. To enact regulations that would likely force some of the best 

professionals to exit the ESOP appraisal market would be a detriment to ESOPs and Plan participants. 

Your proposal would harm the very people you are seeking to safeguard. For those appraisers that are

able to secure fiduciary liability insurance coverage, the fees charged for ESOP-related valuation services 

would rise substantially. 

2. A critical flaw of the DOL proposal is that it conflicts with current law. Current law requires that 

an ESOP purchase Plan assets at no more than “adequate consideration” and sell Plan assets at no less 

than “adequate consideration,” with adequate consideration defined as fair market value. For stock in a 

private company, fair market value must be determined by an independent qualified appraiser, although 

the DOL has yet to issue definitive guidelines as to what constitutes “independent” or “qualified.” 

According to Webster’s dictionary, a “fiduciary” is “a person to whom property or power is 

entrusted for the benefit of another.” In ESOP terms, a fiduciary’s role is to act in a manner that is solely 

in the interests of Plan participants. An ESOP is one party to a two-party transaction to buy or sell stock 

in the sponsor company. If the appraiser hired by the ESOP is considered a fiduciary, it is impossible for 

them to be “independent.” 

I believe the American Society of Appraisers (“ASA”) is the most respected business valuation 

trade organization. Members of ASA must prepare appraisals in accordance with the Uniform Standards 

of Professional Appraisal Practice (“USPAP”). My personal opinion is that all appraisals for ERISA 

(i.e., ESOPs) and the IRS (i.e., gift, estate and income tax work) should be done in conformance with 

USPAP. All appraisals done by a member of ASA must also adhere to ASA’s Standards of Practice and 

Code of Ethics. USPAP and ASA’s Standards of Practice and Code of Ethics require that the appraiser be 

“independent” and have “no bias with respect to the parties involved.” If an appraiser is considered an 

ESOP fiduciary, he/she does not meet either of these tests. As a fiduciary, he/she is not independent and 

has a bias with regard to one of the parties involved. Based on a strict adherence to USPAP and the Code 

of Ethics, essentially no credentialed appraiser would be allowed to prepare ESOP appraisals. 
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3. I believe a distinction should be made between ESOP professionals that are providing “appraisals” 

(i.e., an independent opinion of fair market value) and more complex “financial advisory” services. The 

ESOP community often uses these terms interchangeably. They are different. 

An “appraisal” provides an unbiased opinion of the fair market value of an asset by someone who 

is qualified by training, experience, etc., to provide such an opinion. An appraisal provided to an ESOP 

trustee must arrive at the same conclusion as an appraisal that was prepared for a selling shareholder in 

the sponsor company. It has to. If it does not, the appraiser has violated the “independence” and “bias” 

provisions of USPAP and the Code of Ethics. It makes no sense to consider an “appraiser” that is 

providing this service to be a fiduciary. 

A valuation professional providing “financial advisory” services to an ESOP is a different matter. 

Valuation firms that provide “financial advisory” services in connection with an ESOP transaction often 

do not provide an “appraisal.” They may provide only a fairness opinion. The purpose of a fairness 

opinion is to provide assurance that a transaction is fair to a specific party “from a financial point of 

view.” Unlike an appraisal, where the work product is to provide an independent opinion of value, the 

role of a financial advisor to an ESOP in a transaction is to ensure that the transaction is fair “from a 

financial point of view” to the ESOP. The financial advisor is not independent. 

The role of a financial advisor in a transaction is much broader than simply providing an opinion 

of value. The financial advisor may actively participate in negotiations, may help structure the 

transaction, may assist in arranging financing, may assist in finding a potential buyer, etc. In these 

circumstances, the financial advisor is acting as an agent of the ESOP (not as an independent appraiser) 

and it is understood that their role is to help “negotiate the best deal possible for the ESOP.” 

Many “appraisers” (including myself) do not provide the complex financial advisory services 

described above. Our role is to provide the ESOP trustee with an independent appraisal of fair market 

value. The investment decision is strictly that of the trustee, who must consider a myriad of factors in 

addition to “fair market value.” Appraisers are not in the business of providing investment advice in that 

we do not provide a recommendation to buy or sell securities. We have no authority (or responsibility) to 

manage Plan assets. The role of an independent appraiser is not to assist the trustee in negotiating the 

“best deal.” It is simply to provide the trustee with an objective, unbiased analysis so that the trustee does 
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not violate the “adequate consideration” requirement. The DOL must make a distinction as to the type of 

service provided to the ESOP. It is not appropriate to lump all types of valuation services together. 

4. The DOL’s definition of fiduciary with regard to ESOPs has been in effect since 1976. The logic 

that was espoused in DOL Advisory Opinion 76-65 is still just as valid today as it was in 1976. Remedies 

are already available to trustees to bring actions against appraisers for “faulty appraisals.” Less drastic 

alternatives are available to the DOL. These include issuing final ESOP valuation regulations and 

requiring that ESOP appraisers be credentialed by a professional appraisal organization (such as ASA) 

that has a Code of Ethics and/or conforms to USPAP. The problem might be best addressed by ensuring 

that existing fiduciaries (such as ESOP trustees) have some minimum financial background (or degree of 

knowledge of business valuation) so that they can competently assess the valuation work provided to 

them. 

5. The only beneficiary of your proposal would be ESOP litigation attorneys who are trolling for 

ESOP companies that have fallen on hard times. Irregardless of the fact that this country has still not 

emerged from the worst economic downturn since the Great Depression, ESOP attorneys will 

undoubtedly blame “faulty appraisals” for a company’s financial difficulties and sue everyone in sight. If 

appraisers are now considered “fiduciaries,” it makes for a larger group of prime defendants. 

6. A related issue is that of co-fiduciary liability. This will create a Pandora’s box when trying to 

assess how the responsibility for errors is allocated. With co-fiduciary liability, are different professionals 

(appraisers, attorneys, outside trustees, etc.) now responsible for each other’s work? As an appraiser, I am 

not trained in the law or in being a trust officer, nor do I want to be. 

In conclusion, I believe the current DOL proposal will do more harm than good for the entire 

ESOP community and Plan participants. 

Thank you for your consideration. 

Sincerely, 

Mark P. Pagano, CFA, ASA 

Sole Member 

Pagano Appraisal Group, LLC